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Are Brazilian Firms Savings Sensitive to Cash Windfalls?

  • Cristiano M. Costa

    (Economics Department, University of Pennsylvania)

  • Lourenço Senne Paz

    (Economics Department, University of Pennsylvania)

  • Bruno Funchal

    (FUCAPE Business School)

Following Almeida, Campello and Weisbach (2003), we use the link between financial constraints and firm’s demand for liquidity to test the effect of financial constraints on firm policies in Brazil. The effect of financial constraints can be captured by a firm’s propensity to save cash out in addition of cash inflows. While constrained firms should have a positive cash flow sensitivity of cash, unconstrained firms’ cash savings should not be systematically related to cash flows. Using 2SLS method to deal with endogeneity problems, we estimate the cash flow sensitivity of cash using a large sample of Brazilian manufacturing firms over the 1995-2007 period and, using the access to international financial markets trough ADRs as a criterion for financial constraint, we find that firms that are more likely to be financially constrained display a significantly positive cash flow sensitivity of cash, while unconstrained firms do not.

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File URL: http://www.bbronline.com.br/public/edicoes/5_2/artigos/tw4ow5td002122010102436.pdf
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Article provided by Fucape Business School in its journal Brazilian Business Review.

Volume (Year): 5 (2008)
Issue (Month): 2 (May)
Pages: 136-142

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Handle: RePEc:bbz:fcpbbr:v:5:y:2008:i:2:p:136-142
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  1. Tim Opler & Lee Pinkowitz & Rene Stulz & Rohan Williamson, 1997. "The Determinants and Implications of Corporate Cash Holdings," NBER Working Papers 6234, National Bureau of Economic Research, Inc.
  2. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, 04.
  3. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  4. Steven N. Kaplan & Luigi Zingales, 1995. "Do Financing Constraints Explain Why Investment is Correlated with Cash Flow?," NBER Working Papers 5267, National Bureau of Economic Research, Inc.
  5. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  6. repec:fgv:epgrbe:v:57:y:2003:i:2:a:846 is not listed on IDEAS
  7. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, 08.
  8. Kim, Chang-Soo & Mauer, David C. & Sherman, Ann E., 1998. "The Determinants of Corporate Liquidity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 335-359, September.
  9. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
  10. repec:fgv:epgrbe:v:57:n:2:a:6 is not listed on IDEAS
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